Forecasters weigh in on new frugality

Is it here to stay or not? Two economists differ

The longer the recession drags on, the more consumers adopt frugal habits.

The big question: Will this new frugality last or is it just a passing fad? We asked two forecasters to give us their takes on how "sticky" frugality will be.

Will frugality last? Two forecasters' predictions

David Cross

David Cross, president of the California-based economic and demographic research firm Market Outlook, takes the view that consumers will start spending again -- though not quite as wildly -- as soon as the job market improves.

Gary Shilling

Gary Shilling, president of New York-based economic consulting firm A. Gary Shilling & Co. Inc., says the squeeze of debt and a painfully slow recovery mean we'll be forced to keep pinching pennies for many years to come.

Q: Will the new frugality last? Why or why not?

Shilling: I think it will, and it's because consumers have no choice.

If you go way back, people coming out of the Depression had a frugality, but that was really forced on them. The roaring '20s were pretty fast and loose on spending -- that's when consumer credit was developed, and GE got into the credit business to finance appliances. That was a high-flying decade, but then the 1930s came along and anybody with any borrowing was in deep trouble, particularly if they lost their jobs, so you had frugality. That wore off, and by the time you got to the post-war babies, money was freely available, and people were trained to believe they deserved instant gratification.

Now, consumers really are being forced to change their views. It isn't that a husband and wife wake up one morning and say, "Hey, we're in way over our heads in debt. We've got to cut back." No, as long as they could borrow and there was something to collateralize their borrowing -- first stocks, then houses -- people continued to do so. But that's over, and with other forms of borrowing -- credit cards -- obviously a lot of people are delinquent. They're in over their heads. So they really have no choice.

Cross: In my view, the new frugality is very much a reflection of the temporary nature of the stress on household finances -- and temporary might mean a few years. But I don't see any evidence that there's a permanent change in attitude toward spending. People are always more cautious when they're afraid of losing their jobs. When the job market starts to come back -- and it will come back very slowly -- I think we'll see a resumption of spending.

I don't see any evidence that there's a permanent change in attitude toward spending ... When the job market starts to come back -- and it will come back very slowly -- I think we'll see a resumption of spending.

-- David Cross
Market Outlook

Q: What's your take on consumers in surveys who are saying they have really embraced frugality?

Shilling: They're making a virtue out of necessity -- like women shopping in their closet rather than going to Saks or Nordstrom. I think that's what it really amounts to. It's similar to people coming out of the 1930s. They had big mortgage-burning parties -- the idea was to pay off that mortgage, then invite all your friends over, have a big blast. It wasn't treating your house as a continually filling piggy bank that you tap all the time -- it was a very different attitude, that saving was a virtue. Well, hey, it was forced on them by the '30s.

Cross: People say it's changed them forever -- until it hasn't changed them. Until things level off, and they get a raise, and they've deprived themselves for so long -- so they go out and spend a little bit.

Any time you look at a consumer survey, you really have to position it in time and think about what kind of fear they're experiencing, what they're reading and seeing on television -- and lately it's pretty grim. It's human nature for people to feel like they're going through something extraordinary, especially for young people who have not experienced a recession. It's like the world has ended for them.

I'm not saying there won't be some memory there, especially given the depth of the recession. But still, we will see recovery, and when we do, there's always an upsurge in pent-up demand.

Q: So, we're looking at many more years of frugality?

As far as I'm concerned, we have crossed a watershed here. We're in a different era where we're going to see the savings rate climb.

-- Gary Shilling
Gary Shilling & Co.

Shilling: Yes. The other factor, which is very important, is that post-war babies are now looking retirement in the teeth, and most of them have not saved. Statistics show that they don't even have one year's financial assets relative to their income -- and that plus Social Security is not exactly a comfortable retirement. So, they need to save, and can save because many of them are in their 50s, and that's when people have their peak career earnings. As far as I'm concerned, we have crossed a watershed here. We're in a different era where we're going to see the savings rate climb.

Cross: Fast forward five or 10 years, and it becomes a critical period for a large segment of the population -- the baby boomers. I don't think boomers are going to retire at nearly the same percentages as previous generations. They've got enormous financial pressure, not just because of the collapse of the stock market and home equity values, but because they are financially responsible for aging parents, they're still subsidizing their children, and they've had large mortgages at a late stage in life. There are lots of things to suggest that boomers will continue to work -- and spend.

I don't think the personal savings rate is going to be much different from where it is right now.

-- David Cross
Market Outlook

Q: What's your prediction for the personal savings rate for the next 10 years?

Shilling: I think that the savings rate is, on average, going to go from the 1 percent low of two years ago to probably into double digits over the next 10 years. It's probably going to average an increase of about 1 percentage point a year. And that's very important because you're going from spending growing faster than incomes by half a percent a year to spending growing slower than incomes by 1 percent -- that's a 1.5 percentage point swing. In 10 years, I think [the U.S. personal savings rate] probably will be in the 10 percent to 12 percent range -- and maybe higher.

Cross: I don't think the personal savings rate is going to be much different from where it is right now. It'll be higher than it was before we entered this recession back in 2007, down at about 1 percent or 2 percent. I think we're going to see a savings rate in the neighborhood of 4 percent to 6 percent -- half of what the historical experience has been in Western Europe, but very much in line with what the demographics point to and also the continued stress we'll see on household finances for a very long time.

Q: Instead of turning to credit cards to handle emergencies, will more consumers accumulate cash cushions?

Shilling: Absolutely. And by the way, the whole driving force here is the miserable unemployment situation. If we're right and we have slow growth, in part because of consumers' retrenchment, we're going to have chronically high unemployment -- not just now, but over the next 10 years. That's another huge incentive to save.

We're seeing people switch from credit cards to debit cards -- in other words, 'I want to have that money in the bank before I spend it.' That attitude will continue.

-- Gary Shilling
Gary Shilling & Co.

Cross: Borrowing is different -- a lot of that was pushed on consumers by very aggressive lenders. If you could demonstrate that you were alive, you could get a credit card a few years ago. As long as banks are under stress and there are stronger federal regulations, there won't be as much of a push. Lending will come back, and people will have greater access to credit, so you will see a rebound in borrowing -- but the new normal is not 2004, 2005 and 2006, when there were no restrictions. It's more like back to the 1990s when you needed to demonstrate some income in order to get a loan or a mortgage. They still were very good times for consumer spending and household income growth. A lot of growth in consumer spending [before the recession] was pushed along by a credit bubble and a housing bubble -- that was not normal. In the future, we will see more normal credit conditions.

Q: What will the mindset of U.S. consumers look like over next 10 years?

Shilling: We're going to see a lot more emphasis on saving money and using that savings to pay down debt. Consumer debts are just monstrous -- the really serious problem is these excess debts that people ran up on mortgages, home equity loans, auto loans, credit cards, student loans -- the whole spectrum. So, we're seeing layaway plans make a comeback. We're seeing people switch from credit cards to debit cards -- in other words, "I want to have that money in the bank before I spend it." That attitude will continue.

People are going to be very, very cautious in their spending -- and it's amazing the things that people are finding are really discretionary. People are cutting out bottled water. They're brown bagging lunches. It'll be interesting to see if things like home sewing make a comeback. There are a lot of things that could change out of this -- it depends how pressed consumers are and how thrifty they want to be.

Cross: There also is this notion here and abroad that the so-called profligate American consumer, the big-spending, freewheeling consumer is gone -- that the Chinese consumer will have to step up to the plate because the American consumer is down and out forever. It's true we've had a double-digit drop in retail sales, but that's not permanent. When the job market starts improving, and the credit market starts to get back to normal, people will get loans and credit cards. We'll look back and say that this was a really nasty experience, but it's not something that lasts forever.

Updated: December 1, 2009

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